Friday, October 25, 2013

Another interesting paper that supports the New Keynesian sticky price
assumption:

Are Sticky Prices Costly? Evidence From The Stock Market, by Yuriy
Gorodnichenko and and Michael Weber, NBER: Abstract We
show that after monetary policy announcements, the conditional volatility of
stock market returns rises more for rms with stickier prices than for firms
with more flexible prices. This differential reaction is economically large
as well as strikingly robust to a broad array of checks. These results
suggest that menu costs -- broadly defined to include physical costs of
price adjustment, informational frictions, etc. -- are an important factor
for nominal price rigidity. We also show that our empirical results are
qualitatively and, under plausible calibrations, quantitatively consistent
with New Keynesian macroeconomic models where firms have heterogeneous price
stickiness. Since our framework is valid for a wide variety of theoretical
models and frictions preventing firms from price adjustment, we provide "model-free" evidence that sticky prices are indeed costly.

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Are Sticky Prices Costly? Evidence From The Stock Market

Another interesting paper that supports the New Keynesian sticky price
assumption:

Are Sticky Prices Costly? Evidence From The Stock Market, by Yuriy
Gorodnichenko and and Michael Weber, NBER: Abstract We
show that after monetary policy announcements, the conditional volatility of
stock market returns rises more for rms with stickier prices than for firms
with more flexible prices. This differential reaction is economically large
as well as strikingly robust to a broad array of checks. These results
suggest that menu costs -- broadly defined to include physical costs of
price adjustment, informational frictions, etc. -- are an important factor
for nominal price rigidity. We also show that our empirical results are
qualitatively and, under plausible calibrations, quantitatively consistent
with New Keynesian macroeconomic models where firms have heterogeneous price
stickiness. Since our framework is valid for a wide variety of theoretical
models and frictions preventing firms from price adjustment, we provide "model-free" evidence that sticky prices are indeed costly.